Before World War II, Japan was known as the Land of the Rising Sun. After its devastating defeat, however, it became known as the “land of the setting sun” — a description that became the title of a book by the well-known Japanese novelist, Osamu Dazai.
Written shortly after the war, Dazai’s book is essentially about the post-war disintegration of Japanese society. Dazai was a morose existentialist who eventually committed suicide, as did many Japanese after their humiliating defeat. Even today, Dazai’s book, The Setting Sun, is a best seller in Japan.
The doom and gloom that hung over Japan after the war began to change after Japan’s economic rapid growth spurt between 1955 and 1961, which laid the ground work for the "Golden Sixties." In 1965, Japan's nominal GDP was estimated at just over $91 billion. Fifteen years later, in 1980, the nominal GDP had soared to a record $1.065 trillion. This time period is often called the “Japanese post-war economic miracle.”
As is now common knowledge, the Nikkei hit a high of over 38,000 in 1989 and today stands close to 16,000. Since the end of the “post-war miracle,” Japan has been engaged in a huge Keynesian-driven strategy to bolster its economy. Though different in many ways from the U.S. economy — which for one thing has much better demographics (Japan sells more adult diapers than baby diapers) — the U.S. stands to learn from the Japanese experience.
Stephen Moore, chief economist at The Heritage Foundation, authored a Sept. 14 article in the Daily Signal, “Japan’s Lousy Economy is a Warning for the U.S.” His view of Japan’s economy policies is summed up in the statement that, “By almost any measure of wealth and income, Japan has suffered through a two-decade-long financial malaise due to a series of catastrophic Keynesian policy mistakes.” Moore draws the different corollaries between the U.S. and Japan with observations such as, “from the late 1980s through 2000, the [Japanese] central bank’s balance sheet more than doubled — a precursor to the ‘quantitative easing’ carried out by the U.S. Federal Reserve. And since 2000, the balance sheet has doubled once again.” This effort to stimulate the Japanese economy “with a monetary policy almost unprecedented in its looseness” has simply not worked. In fact, mostly due to “a 60% sales tax hike to finance Tokyo’s rampant government spending,” Japan is considered by many to be on the verge of yet another recession.
Moore ends the article with a somewhat portentous conclusion: “For America, the sad lesson of the setting sun of Japan’s once-rising economy is that Keynesian policies never lead to the promised land of recovery and prosperity … bungled policies and dreadfully bad economic advice have toppled an economic empire, and the worry is that if the U.S. doesn’t learn from these mistakes, it could happen here too.”
Conclusion
Unlike the bursting of Japan’s asset price bubble in 1991, from which it never recovered, plan sponsors, DC investors and plan advisors feel they dodged a bullet given the fact that U.S. stock market did spring back to new highs after the Great Recession. The U.S. recovery, however, is rooted in the same polices that Japan has been pursuing for a quarter of a century now. In the case of Japan, other than the piling on of ever-increasing government debt, these polices have not been successful. Although certain economists, such as The New York Times’ Paul Krugman, have touted Japan as a potential “model” for the U.S., it is becoming more evident that Japan is emerging as a model of what not to do in order to create a more expansive economy.
Increasingly, plan advisors are focusing less on individual security selection (as is evident from the growth of passive investing) and more on asset allocation programs, primarily TDFs and, to a lesser degree, managed accounts. Though complacency is at an all-time high, with market bears at a 27-year low, plan advisors should not fall into the trap of thinking that the danger is behind us. Ultimately, the fiddler must be paid — either through reaping the benefits of an expanding economy or through the deflation of asset prices.
Plan advisors serve their clients well when they take the threat of a major market reversal seriously and do everything they can to ensure that there is as much down-side protection as one can reasonably expect. TDFs are becoming increasingly sophisticated in terms of their use of alternatives, global diversification and overall risk management. In the TDF selection process, it seems wise to consider how a given glide path would impact investors in the event that the U.S. implementation of Keynesian principles — to propel the U.S. economy out of recession — simply does not work out the way many economists had hoped.
